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Dividend Payout Ratio and Dividend Yield
Understanding Dividend Payout Ratio
The Dividend Payout Ratio (DPR). It almost seems like a measurement invented because it looked like it was important, but nobody can really agree on why.
The DPR (it usually doesn’t even warrant a capitalized abbreviation) measures what a company’s pays out to investors in the form of dividends.
You calculate the DPR by dividing the annual dividends per share by the Earnings Per Share.
DPR = Dividends Per Share / EPS
For example, if a company paid out Rs 1 per share in annual dividends and had Rs 3 in EPS, the DPR would be 33%. (1 / 3 = 33%)
The real question is whether 33% is good or bad and that is subject to interpretation. Growing companies will typically retain more profits to fund growth and pay lower or no dividends while already stabilized company may pay higher dividend.
But broadly speaking 33% is good value. Companies that pay higher dividends may be in mature industries.
Understanding Dividend Yield
Not all of the tools of fundamental analysis work for every investor on every stock. If you are looking for high growth technology stocks, they are unlikely to turn up in high dividend payout category.
However, if you are a value investor or looking for dividend income then there are a couple of measurements that are specific to you. For dividend investors, one of the telling metrics is Dividend Yield.
This measurement tells you what percentage return a company pays out to shareholders in the form of dividends. Older, well-established companies tend to payout a higher percentage then do younger companies and their dividend history can be more consistent.
You calculate the Dividend Yield by taking the annual dividend per share and divide by the stock’s price.
Dividend Yield = annual dividend per share / stock's price per share
For example, if a company’s annual dividend is Rs 1.50 and the stock trades at Rs 25, the Dividend Yield is 6%. (1.50 / 25 = 0.06)